- Deadline set for Nov. The Star reported on Wed that the Federal Government is looking at coming up with a solution for the long-drawn water impasse in three months time. At the same time, Selangor Menteri Besar Tan Sri Khalid Ibrahim reiterated that he is ready to hold talks on the water restructuring exercise and the development of the Langat 2 plant. Energy, Green Technology and Water Minister Datuk Seri Dr Maximus Ongkili was quoted in The Star as saying that the recommendation for the water consolidation would be on a “willing buyer, willing seller” basis. However, Khalid said the state wanted to take over the water concession on its own terms and has “prepared drafts” for the restructuring process. We view this development positively as it reaffirms our optimism of a concrete solution in the near term. Recall that earlier this month, The Edge Malaysia also reported that Putrajaya is willing cooperate on the consolidation process. At the same time, the state would carve out up to 150 acres of land in Serdang for the Perdana University Graduate Medical School. Khalid had also indicated in earlier reports that he hoped to conclude the water consolidation process by year-end.

- Details yet to surface. While the terms of the deal have yet to be announced, both SPLASH and Konsortium Abass had earlier indicated their willingness to accept the offer by state government-owned Kumpulan Darul Ehsan Bhd (KDEB). However, Puncak Niaga Holdings Bhd has yet to agree to the offer. Recall that the previous and fourth offer was made in February for KDEB to acquire all the state’s water concessionaires for RM9.6bil. The key components of the offer were:- (i) equity contributions (plus return of 12% p.a.), and (ii) water assets (net liabilities) to be assumed (see Table 1). The whole idea of the consolidation is for the state (through a special purpose vehicle) to hold all the water concessions while the assets would be assumed by Pengurusan Aset Air Bhd (PAAB), a wholly-owned unit of Ministry of Finance Inc. The state government would then lease the assets from PAAB and operate with a service license. The ultimate objective of the new structure is to ensure lower water tariffs in Selangor as the service licensee would operate on an asset-light model. We understand that the equity holders of the water concessions would be paid in cash for their respective offers while PAAB would determine any surplus value (water assets less liabilities) to be subsequently paid directly to the water concessionaires.

- Langat 2 must happen. At the centre of the water consolidation is the Langat 2 water treatment plant that must be built to address water shortage in Selangor. The 1,130 MLD plant would process raw water from Pahang in order to meet the demands in Selangor, KL and Putrajaya until 2025. We understand that three contractors have been shortlisted by the Federal government for the first package of Langat 2 worth RM1.2bil; namely Salcon, MMC Corp and Ahmad Zaki Resources Bhd. In addition, we see JAKS Resources as a front-runner for the water pipe package worth an estimated RM800mil for the Langat 2 project. This is because JAKS is the only integrated water engineering specialist who can deliver large transmission line pipes in Malaysia on a supply-and-lay basis and it can produce large water pipes of up to 3m. Maintain OVERWEIGHT. We maintain OVERWEIGHT on the water sector following tangible developments for the resolution of the water impasse. We have a BUY on Puncak Niaga with a fair value of RM4.02/share, based on a 40% discount to its NAV. We also estimate Kumpulan Perangsang Selangor Bhd’s (KPS) implied value at RM2.54/share, based on a 40% discount to its break-up value of RM4.23/share. Water assets make up 90% and 69% of Puncak’s and KPS’ NAVs respectively. Our valuations are based on:- (i) KDEB’s fourth and previous proposal in February, and (ii) offers are net of debt. Key risks to our overweight call include:- (i) Further delays in water consolidation negotiations; (ii) Difference in valuations (e.g. whether it is gross or net of water-related debts or if receivables are included); (iii) Disputes in pricing for the physical water assets owned by the Selangor government and how it would be funded; and (iv) associated implications of the Langat 2 project on the water restructuring exercise.

Source: AmeSecurities